In this article we study the theory of monetary policy when the monetary au
thority faces asymmetries in the countries constituting the monetary union.
We identify two asymmetries (shocks and transmission) in the context of a
two-country model. A general finding is that, as the degree of asymmetries
increases, the effectiveness of stabilization of output and unemployment is
reduced. As a result, when asymmetries increase, the stabilization effort
of the central bank declines for given preferences about stabilization. We
also find that the central bank can improve the efficiency of its monetary
policies when asymmetries in the transmission exist, by using national info
rmation in the setting of optimal policies. The declared strategy of the EC
B conflicts with this prescription. However, in practice the ECB is likely
to follow this prescription.